Will Free Microsoft Office Bring Small Businesses to the Cloud?

Microsoft (MSFT) and Google (GOOG) have fought for business customers for years, but lately the blows seem to be coming more quickly. The latest strike from Microsoft is its Wednesday launch of Microsoft Office Web Apps, which offers small businesses, consumers, students and others free access to online versions of Word, Excel, PowerPoint and OneNote via a Windows Live account.

Industry observers view the new offering as a counter to Google's encroachment into the Redmond giant's coveted business-software segment, starting with Google Docs back in 2006. The search giant has expanded its business offerings since then, in March rolling out its Google Apps Marketplace to encourage other developers to use its platform and help it further target the enterprise market.

But whether small businesses will flock to Microsoft's hosted online applications, otherwise known as a cloud computing, remains to be seen. "For small businesses of 100 employees or less, this is all evolutionary," says Brad Reback, an analyst with Oppenheimer & Co. "While things happen fast in the consumer market, it's slow with [companies]."

Trust Issues

For both small companies and major corporations, cloud computing faces similar challenges. One of the most notable is the issue of trust. Before they'll adopt cloud computing, these customers must first trust the outside company hosting the software, such as Microsoft or Google, to run applications crucial to keeping their operations humming. They must also trust the outside company to store highly confidential and sensitive information.

In addition, smaller companies without internal IT departments will likely need an outside consultant to migrate their information from their existing computer systems to the hosted applications system, and also will need support in learning the new system, analysts note.

But compared to large corporate customers, otherwise known as enterprise customers, small- and medium-sized businesses have it easier in one respect: They likely won't have to deal with the difficulty of trying to get millions of dollars worth of older software and systems to communicate with the cloud.

As a result, small and medium-sized businesses may find cloud computing more attractive than large corporate customers, says Brent Thill, an analyst with UBS (UBS). "All they need is a browser," he says. "They don't have to worry about installing the software, maintaining it or backing up the data."

Late to the Party

Microsoft Office Web Apps comes more than three years after Google began offering small businesses and consumers the option of hosting documents on its site with Google Docs. Google has meanwhile expanded from offering free simple business applications, such as word processing and spreadsheets, to a premium service which charges a monthly rate for added features. As Thil puts it. "Microsoft is offering [Office Web Apps] as a defensive move."

That doesn't mean it won't win customers, however. "Microsoft was late to the party, but the company isn't thought of as an innovator," Thil says. "But when it jumps on a trend, it gets it right."

The software giant has two advantages over Google: 500 million Microsoft Office customers who may be interested in upgrading to Office 2010, which also launched Wednesday, and a long history of providing support and maintenance for the software it sells.

"Google can try to show it can do enterprise [hosted Web applications] but they need to show they can also do support and maintenance," Thill says. "They also have to address the compliance issue. Some businesses, like financial and regulatory agencies, have to know where the data resides. In some cases, the data can't reside outside of the U.S."

Microsoft thinks it has another advantage as well: it's flexibility. Reed Shaffner, a Microsoft Office senior project manager, notes that businesses can either run their applications on Microsoft's cloud or -- by loading up the company's software -- on their own computer systems. "A small-business owner may want to own their Office CD and upgrade when they're ready," Shaffner says, noting that a large chunk of those owners prefer to have that control over their core applications.